Answer to Question #48168 in Economics for sara

Question

1) Explain coherently how internal economies of scale give rise to some trade patterns observed in the world today. What are these patterns of trade known as? (A full verbal and graphical explanation is required)

2) “Emerging economies, such as China, pose a threat to the comparative advantage of the U.S.” How can such a statement be evaluated using the insights learned from the standard trade model? Provide full verbal and graphical explanation

Answer 1

1) Internal economies of scale is a measure of how efficient a company is at making its products that the business has the ability to manage directly. Internal economies of scale are related to the shift in average production costs for a business as it boosts its overall product output and the average cost per unit falls until maximum efficiency is attained. Differing internal economies of scale are commonly used by manufacturing businesses as a way to create an optimal balance between output and average production costs. The objective is to maximize production efficiency. The effect is a decrease in unit costs of production, ultimately allowing the business to lower consumer prices and still make a profit.
2) Emerging economies, such as China, pose a threat to the comparative advantage of the U.S. It would appear so, given the rhetoric in recent months by American politicians and some business people, who have complained about the loss of U.S. jobs to China, unfair Chinese trade practices and a Chinese foreign currency policy that favors Chinese exporters who flood world markets with cheap goods. But faculty members at Wharton and other business schools say the complaints are misplaced and driven by politics.

“Free trade is good … and in the long run it’s good for both the U.S. and China,” says Wharton finance professor Franklin Allen. “In the short run, there will be adjustment costs [such as lost jobs]. Protectionist arguments are designed to address the sort of problems that occur in the short run, but protectionism is like pushing against the tide.”